Tax Systems: Public Sector Economics II

Flashcards about Public Revenues, Types of Taxes, and Tax Systems

What are the sources of public revenues?

Public sources (transfers, foreign institutions, market interests), private sources (market exchanges, state power such as expropriation, sanctions, fiscal power with dues, fees, levies, and taxes).

What is the benefit principle in taxation?

The taxpayer pays according to the benefit obtained for a service or public expense program; used for fees and special levies, financing current and investment expenditures, respectively.

What are the main differences between fees, special levies, and taxes?

Fees and special levies follow the benefit principle and are compulsory; taxes are typically for general expenditures and follow the ability to pay principle. Public sector does not obtain any profit from fees and special levies.

Define Tax Base.

Base Imponible

Define Tax Rate.

Tipo de gravamen

Define Tax Credits.

Deducciones

Name the types of taxes on earnings.

The Payroll Tax (Social Insurance)

Name the types of taxes on income.

From individuals: the Personal Income Tax; From companies: the Corporate Income Tax

Name the types of taxes on wealth.

Property Tax, Inheritance Tax

Name the types of taxes on consumption.

Sales Taxes: Value Added Tax (VAT); Excise Taxes: Alcohol, Tobacco, Fuel

What is the distinction between direct and indirect taxes?

Direct taxes are directly related to the ability to pay (income, wealth), while indirect taxes are levied on an indirect ability to pay (purchases). Also, in direct taxes, the Duties’ Person is the Taxpayer, while in indirect taxes, they are different.

What is a real tax?

Whether they use a person as a reference for the definition of the tax base, or an asset or product.

List the main tax revenues by percentage.

Income Tax (29%), Corporate Income Tax (7%), Value Added Tax (21%), Excise taxes (5%), Social Security contributions (38%).

Explain proportionality in taxation.

The ratio of tax payable to tax base is constant as the tax base rises. ATR=MTR; elasticity tax due to tax base is constant and equals 1.

Explain progressivity in taxation.

The ratio of tax payable to tax base rises as the tax base rises. ATR<MTR; the elasticity tax due to tax base is higher than 1.

Explain regressivity in taxation.

The ratio of tax payable to tax base decreases as the tax base rises. ATR>MTR; the elasticity tax due to tax base is less than 1.

Name the objectives of tax systems.

• Justice

• Efficiency

• Stability development

• Effectiveness

Why is Broad Basing important for tax systems?

Tax bases must be wide, relating its contents and the territory, the number of exemptions must be restricted and clearly supported.

What are the principles of taxation equity?

Horizontal equity (equals must be taxed equally) and vertical equity (different taxpayers must be taxed differently).

What is the Benefit Principle?

Relates the tax burden with the benefits received by individual from the expenditure program.

What is the Ability to Pay Principle?

Takes into account the individual possibilities to pay taxes, according to income, wealth and consumption.

What does fulfilling the Ability to Pay Principle mean regarding Horizontal Equity?

Two similar taxpayers must be levied in the same amount, no matter the benefits they could receive from the Public Sector.

What does fulfilling the Ability to Pay Principle mean regarding Vertical Equity?

Different taxpayers must be taxed differently, but this difference must be ‘suitable’: Rules of Equal Sacrifice

What are the Rules of Equal Sacrfice?

Equal absolute sacrifice: implies the same loss of wellbeing; Equal proportional sacrifice; Equal margainal sacrifice.

What does economic efficiency require?

Neutrality, minimising Dead Weight Loss.

What does economic stability need?

Adequacy to generate enough revenues and Adaptability to economic cycle.

What should the fiscal system include to generate economic development?

The fiscal system must provide instruments to easily use fiscal benefits (tax credits, exemptions or allowances, …)

What does effectiveness entail for a fiscal system?

The fiscal system must be simple and transparent, looking for convenience and predictability.